Analysis: Implications of Russia rejoining the Black Sea grain corridor

The 3 factors that may change how the deal operates

Russian authorities have signaled they will rejoin the Black Sea grain export corridor deal just days after pulling out in the wake of a drone attack on the port of Sebastopol, in a move that could pave the way for the restoration of exports from key Ukrainian deepwater ports.

Key international futures contracts posted heavy price falls as investors anticipated the restoration of supply from Ukraine, but significant uncertainties remain.

Fastmarkets Agriculture looks at three key factors that Russia’s departure from the agreement has highlighted and ways in which the implementation of the deal might change.

Prioritization

One of Russia’s key complaints has been that the grain corridor has favored rich nations over developing and middle-income countries, frequently citing the accusation that the bulk of exports has gone to the European Union.

United Nations data puts the total exports at just under 10 million tonnes, 43% of which has been corn and 28% wheat, with rapeseed, sunflowers, barley and other products accounting for the balance.

The single biggest recipient has been Spain, clocking up 1.8 million tonnes, followed by Turkey with 1.3 million tonnes and then China with just under 950,000 tonnes.

But trade sources have asked whether the return of Russia will involve an attempt to prioritize exports to poorer countries at the expense of richer importing nations – a stipulation that could dampen the appetite of some exporters and revenues for Ukraine’s exchequer.

“People think the JCC is back to normal,” one trade source told Fastmarkets, with the source adding that they expect insurers to also return and, in turn, guarantee freight movements into the Black Sea.

But the prioritization of buyers would be difficult to achieve, they added.

“To prioritize means nothing,” the source said, as purchasing power remains key.

As it is, around one million tonnes of Ukrainian produce has sailed for developing countries, amounting to 10% of total exports.

Oversight

One of Ukraine’s main complaints has been an inefficient compliance process – a significant part of the detail of the original agreement whereby Russian and Turkish authorities inspect all incoming and outgoing vessels at Istanbul.

The stipulation became a major bottleneck as the scheme got into its stride, with Ukraine’s three ports of Pivdennyi, Odesa and Chornomorsk exporting close to a million tonnes a week as volumes ramped up into October.

That led to delays building up in Istanbul, with vessels queuing, demurrage costs inflicted and accusations from Ukraine that the Russian authorities were deliberately dragging their heels to undermine the corridor’s success.

However, after Russia withdrew from the agreement last week, Turkish and Ukrainian authorities agreed to field ten teams to tackle a 40-vessel backlog of ships that were either in a Ukrainian port or en route to Istanbul at the time.

Russian authorities were informed of the plan, and the new approach – without Russian involvement – inspected up to 82 vessels in just two days, according to trade sources.

With Russia rejoining the agreement, the question is being asked: Will the trade accept a longer approval period and the return of queues at Istanbul?

That consideration is particularly important, as Ukraine still has corn stocks to clear but is also now well into harvesting its 2022-23 corn crop, at a time when South America’s corn exports are winding down and the US is facing major logistics issues on the Mississippi.

Russia’s commitment to the deal

The final thought is what it says about Russia’s influence in the Black Sea, with a number of traders highlighting that the gesture to pull out of the deal now looks token, and Russia appears to have been forced to rejoin amid frantic international negotiations.

Russian authorities were thought to have sought assurances that Ukrainian forces would not target Russia’s Black Sea fleet.

If true, it’s an extraordinary stipulation within the context of an invasion triggered by Russia itself.

After Russian authorities declared the guarantees received to be “sufficient”, some traders suggested Russia had blinked first.

“It says to me that Russia accepts their influence on the region is down and they fear the corridor can happen without their consent,” a second trade source said, with a third source noting, “it doesn’t look good for Putin.”

Nonetheless, the Russian exit from the agreement underlined that the country does have the capacity to shut off the export passage – although, in effect, it had already been closed as queues and mounting fears cut off shipowners’ and insurers’ appetites to sail into the Black Sea.

All that adds to the uncertainty amid one of the primary export locations for world grain.

Hear more from Tim Worledge as he focuses on major wheat importers and end users in our recent interview.

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